NEAM Insights

UK Prime Minister David Cameron announced that the UK will hold a referendum on continued EU membership on June 23, 2016. Voters will be asked a straightforward question – Should the UK remain a member of the European Union or leave the European Union? It may be a straightforward question but the implications of the vote for the UK, Europe and the rest of the world are enormous – economically and politically. The prospect for Brexit – British exit from the EU – is an issue all investors and corporations need to be aware of this year. The UK currency, the British Pound, has recently weakened against the US Dollar and the Euro. UK credit has underperformed and foreign demand for UK Government bonds has been weaker. This weaker pricing of UK assets is likely to continue until the referendum takes place. Read More

We believe that many factors that contributed to the precipitous decline in oil prices over the last several quarters will likely constrain any upside over the coming quarters as well. Most importantly, Saudi Arabia has abdicated its traditional role as the swing producer, in an attempt to defend market share and support longer term oil prices; having come this far, we would not expect Saudi Arabia to relent now. Other countries would like to see higher oil prices, but are unwilling (or unable) to give up market share and revenue by cutting production. With sanctions lifted, Iranian supply is increasing. U.S. oil companies have substantially reduced costs and increased efficiencies, maintaining production in 2015 despite lower capital spending and operating costs. Demand has increased, but not as quickly as supply, with modest global GDP growth (and a warm winter in the U.S.) slowing the pace of demand growth. With supply outpacing demand, inventories of crude oil in storage have built. Read More

As we enter 2016, credit investors have much with which to be concerned. A significant decline in commodity prices, softer global economic growth, heightened event risk and thin dealer liquidity have all pressured credit spreads. While these risks remain, we turn our focus to the following question: “Where are we in the credit cycle?” The answer to this question is a key component in determining whether a rise in credit spreads is an opportunity or a warning signal of the arrival of the next credit cycle. In fact, it may be both. Read More

Financial theory has drawn from various scientific concepts including statistical and probability analysis, general equilibrium theory and, unfortunately, the Law of Gravity. Indeed, one might strike an analogy between securitization and Darwinism, considering the expansive application of structured technology since Lewis Ranieri created the first collateralized mortgage obligation in 1983. The evolution has been fitful, and securitization continues to suffer a bad reputation for its role (causation) in the 2008 financial crisis. Nonetheless, past experience has refocused attention on asset quality, bolstered credit support and other structural protections which, together with their currently attractive yield, diversification benefit, and shelter from corporate event risk, render structured products an appealing alternative in today’s market. Read More

In recent years, the euro area has displayed tremendous resiliency. It has withstood lacklustre growth, 2 major recessions, major banking crises, near sovereign collapses and a crisis of confidence in the currency itself. As the world’s largest economic bloc, the euro area’s monetary policy has meaningful influence beyond the euro area and beyond Europe. The policy actions of the European Central Bank (ECB) are therefore of great importance to all that are involved in financial markets and financial services. Read More

The start of 2016 has witnessed extreme volatility in capital markets. While the finger has been pointed at many culprits, from oil prices to China and European banks, one plausible driver has surely been the divergence of monetary policy between the Fed and ECB. In this Quick Takes we examine why the U.S. and Eurozone central banks are embarking on different paths, how sustainable this is in a world of growing headwinds to global and U.S. growth and what the implications for capital markets might be for the remainder of 2016. Read More

The topic of correlation is widely discussed when capital markets roil, as we have experienced recently and during the financial crisis of the last decade. Rating agency models assume correlations between interest rate, credit and equity market risk factors. Regulators reference correlations in their ORSA (Own Risk Solvency Assessment) and solvency bulletins. Insurers’ internal capital models also rely on correlation estimates to determine expected outcomes and copulas for “tail” events.1 Correlation is also embedded within nearly all asset allocation and optimization methods. Read More

The Legacy of Financial Engineering The S&P 500 finished the year trading at virtually the same level where it began. This might lead one to conclude that 2015 was an uneventful year. It was just the contrary as volatility inducing events abounded. The market had to contend with Greece nearly exiting the euro, China accomplishing a shock devaluation of its currency, U.S. corporate earnings contracting, severe compression in the price of oil and other parts of the commodity complex, and the Federal Reserve raising interest rates for the first time in nearly a decade. Read More

As the calendar turns to a new year, the Fed has begun its long awaited program of monetary tightening. The question remains—like the water drought in California—will 2016 bring an end to the “yield drought”? Hope springs eternal and the c-suite is certainly hoping this is the start of a trend toward higher book yields and the inflection point for declining portfolio book yields. This Quick Takes will look at both the prospect for higher levels of investment income and a return to firmer pricing in (re)insurance markets. Read More

Background GR–NEAM utilizes a proprietary methodology to establish fixed income return estimates and corresponding probability distributions for our clients. These return projections and distributions are useful in assessing investment outcomes, as they allow us to quantify risk using analytics such as VaR, T-VaR, probability of negative return, etc. Using this methodology, we’ve prepared an estimate of 2016 fixed income returns for the P&C industry along with an estimate of dispersion around the mean. Using this approach last year, we estimated that the industry would register a total return of roughly 1.5% in 2015. As we prepare to close out the year, that estimate has proven reasonably accurate.[1] Read More